Rizal Rustam STATE POLYTECHNIC OF JEMBER, INDONESIA.

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1 190 Short Communication Agro-Science Journal of Tropical Agriculture, Food, Environment and Extension Volume 8 Number 3 September 2009 pp ISSN EFFECT OF IMPORT TARIFF IMPLEMENTATION POLICY ON REFINED SUGAR PRODUCT COMPETITIVENESS IN INDONESIA. Rizal Rustam STATE POLYTECHNIC OF JEMBER, INDONESIA. ABSTRACT This research is set out to determine the effect of welfare distribution the respect to import duty on the government revenue, consumer expenditures, producer revenues, and efficiency losses (in production, in consumption and net effect), and the level of competitiveness of cane sugar in Indonesia by calculating the Domestic Resource Cost (DRC). The research used secondary data from related preceding researches and other references such as magazines, journals, bulletins and the like. The research result showed that the government revenue, change of consumer surplus, producer surplus, economic net loss in production and consumption and exchange gain economization, are influenced by the import tariff and elasticity price toward supply and demand. It also showed that sugar product competitiveness in Indonesia is higher than the same product from other countries as the value of DRC is less than one. Key word: Sugar, Welfare Distribution, Domestic Resource Cost (DRC), Import tariff. INTRODUCTION The Indonesian government through the Ministry of Commerce and Industry-via letter number: 364/MPP/Kep/8/1999, has carried out import commerce policy. This policy states that public importers are allowed to import sugar. The main goal of import duty implementation is to reduce sugar import volume in order to protect domestic producers against the cheaper foreign sugar products. The admission charge of import applied is ad valorem (i.e. the percentage of the import duty is fixed to all imported commodities). The policy of sugar commerce, rise of competitiveness and efficiency of sugar production are noticeably prioritized to reduce import quota and economize its exchange. The implementation of its commerce is required to support Indonesian government s plans to protect all economic agents. It is expected to result positively in every unit of economic agents welfare, particularly of producers and consumers welfare as well as the sugar product competitiveness in international commerce.with reference to this background the problems under focus are as follows: (i) how sugar commerce policy influence the units of economic agents welfare such as producers, consumers and government; and (ii) how competitive the national sugar is compared to international commerce in order to reduce import quota. Based on these, the present research was initiated to investigate the following issues: (a) the effect of welfare distribution referring to the import duty on government revenue, changes of consumer and producer surpluses and efficiency losses (in terms of production, consumption, and net effect) and (b) sugar product competitiveness in Indonesia by calculating the Domestic Resource Cost (DRC). The results of this research are expected to be useful to the Indonesian government in formulating policy on sugar production.

2 Effect of Import Implementation Policy on Refined Sugar Product 191 RESEARCH METHODOLOGY This Research started with data collection from secondary sources. The researcher employed the library research method which involves collecting data from related preceding researches and other references such as magazines, journals, bulletins and the like. Data were also collected from the statistic bureau, Indonesian Sugar Statistic and Development Center (P3GI), Logistics Affair Agency (BULOG) and other related institutions. To calculate the welfare distribution as the impact of commerce policy through import duty (started from 25% to 120%) on the government revenue, consumer and producer surplus, efficiency losses (production, consumption, and net effect), the formula proposed by Tsakok (1990) was employed. 1. Nominal Protection Coefficient (NPC) is the level of domestic price protection toward foreign commodities: Pd Gross NPC = ---- Pb 2. Change of government revenue (PGR): (NPC-I)(W'-V') PGR(E) = (NPC) 3. Saving of exchange gain for import deficiency (PFE): (NPC l) (ies V'-ep W') PFE= (NPC) 2 4. Net economic loss in consumption (NELc): NELc=0,5ep {(NPC-1) 2 / (NPC) 2 } x W' 5. Net Economic Loss in Production (NELp) : NELp = 0,5 es {(NPC-1 ) 2 /(NPC) 2 } x V' 6. Change of consumer surplus (PWGc): PWGc = -{(NPC-1)/(NPC)x W' } + NELc} 7. Change of producer surplus (PWGp) PWGp= {(NPC-1)/(NPC)x V'} -NELp} 8. Net effect of Price Protection Policy : (Net effect) = WQp + WQc + PGR = -(NELp + NELc) where: V' = Domestic product on the domestic price or support price. W' = Domestic consumption on the domestic price or support price. es = Price elasticity of domestic supply. ep = Price elasticity of domestic demand. Pd = Domestic price of commodity. Pb = World border price. Qc = Total domestic consumption. Qp = Total domestic production. To evaluate the national sugar product competitiveness by applying the following Domestic Resource Cost (DRC) proposed by Tsakok (1990) : n aij Vj j=1 DRC= P r i - k aij P r j j=1 Where : aij, j=1 ke n = coefficient of domestic resource and non-tradable input. aij, j=1 ke k = coefficient of tradable input. Vj = The shadow price of domestic resource. P r i = output on border price (FOB price). P r j= input on border price (CIF price) RESULTS AND DISCUSSION Refined sugar is one of the primary needs of Indonesian people. The need for refined sugar keeps rising continually along with the Indonesian population and income growth. For detailed information, the data on sugar industry in Indonesia are presented in Table 1. Data in Table 1 showed that within 18 years, the total sugar production increased. However, the increase was lower than the entire national sugar demand. The increasing national sugar production did not meet the sugar demand in Indonesia since sugar supply and import were not adequate. The trend in sugar cane production appears to synchronize with the area of land allocated to its production. In 1990, sugar productivity reached tons per hectare on the average, and it declined to tons per hectare in At present, Sugar production in Indonesia is incredibly centralized in Java. This Island is inhabited by almost 67 percent of the total Indonesian population and possesses the largest consumer contribution (almost 75 percent) of the entire domestic sugar production. In 2006/2007, the total sugar cane production in Java recorded 27.9 million tons (74.9%) production outside Java recorded 9.6 million tons (25.1%). In the 2007/2008 annual planting period, the total sugar cane production declined to 23.8 million tons (72.5%) in Java and declined to 8.5 million tons (27.5%) outside Java. On the other side, information from the Indonesian Sugar Statistic and Development Center in 2006 sugar cane planting, in Indonesia showed that sugar cane planting was still concentrated in java. It is

3 Rizal Rustam 192 approximately ha or about percent of the entire sugar cane planting area. Since 1999, the area of sugar cane field has declined. In that year, ha of sugar cane area decreased to ha or percent by 2005/2006 annual planting period. On the contrary, dry field increased from ha to ha equal to percent (Java) and ha to ha equal to percent (outside java) (P3GI 2008). Furthermore, P3GI release that the problem is the sugar cane plants in dry filed has 31.60% productivity lower than in wet fields. As a consequence, sugar cane crystal level (rendement) in dry fields is factually lower than in wet fields. Ratnawati (2006) stated that the rendement in dry and wet fields are 7.59% and 8.12%, respectively. Moreover, sugar cane in dry fields requires high farming cost with different technology and production cost per kilogram and is more expensive since the sugar factory is locationed of a good distance. Nevertheless, in dry fields, sugar cane provides much benefit with minimal effort. The result of applying import tariff toward the welfare of producer, consumer and government are presented in Table 2. By using the data in Table.1, the impact of import tariff implementation is simulated in 25%, 30%, 40%, 60%, 100% and 120% toward the welfare of producers, consumer, and government. If the government s intervention in terms of import tariff implementation is denoted with 25 percent, it results in reducing consumer s welfare measure with the decrease of consumer surplus estimated about billion. The loss in consumer surplus is then distributed to the additional producer s surplus of about IDR billion (74.52%), runs the economy inefficiency from producer sector about IDR billion (1.46%), and contributes about IDR billions to the government revenue (23.26%). The import tariff policy is supposed to economize the exchange gain to the tune of about IDR billions. This calculation is made with reference to the Nominal Protection Coefficient (NPC) estimation of about 1.55, and price elasticity to the national supply and demand is and , respectively. With sugar import in 2008, it is estimated to tons with the exchange rate at IDR /1 US $. Table 1. The Production, demand, import and area of sugar, labour wage and the rate of sugar cane productivity in Indonesia 1990 to 2008 Year Production (ton) Import (ton) Land Harvest of Cane (Ha) Wage Labour (Rp/day) , , , , , , , , , , , , , , , , , Source : Indonesian Statistic Bureau (BPS), World Sugar Cane Statistic 2008/2009, P3GI Pasuruan and Logistics Affair Agency (BULOG) Table 2. The Calculation of Welfare Distribution With Import as 5%, 30%, 0%, 60%, 100% and 120% in billions rupiah (using es 0,025 and ep 0,119) Cane Production (Ton/ha) Item 25% 30% 40% 60% 100%.. 120% 1. NELp 3,8193 5,0849 7, ,427 23,871 28, NELc 37, , , , , , WGp 1905, , , , , , WGc -2536, , , , , , GR 590, , , , , , FE 220, , , , , , E(US$) 162,763$ 163,586$ 65,231$ 68,521$ 175, , Net Effect 41,008 58, , , , ,122

4 Effect of Import Implementation Policy on Refined Sugar Product 193 Table 3. Calculating of Welfare Distribution With Import as 25%, 30%, 40%, 60%, 100% and 120% in billions rupiah (using es 0,41 dan ep -0,45) Item 25% 30% 40% 60% 100% 120% 1. NELp 62, , , , , , NELc 140, , , , , , WGp 1847, , , , , , WGc 2640, , , , , , GR 590, , , , , FE 1695, , , , , , FE(US$) 226,099$ 239,589$ 266,568$ 320,526$ 428, , Net Effect 203, , , , , ,568 Table 2 shows that the higher the import tariff, the higher efficiency losses. This is obviously indicated by net effect value which gradually rose from IDR billion with 25% import tariff to IDR billion with 120% ( more than 2000 percent increase). The government effort to reduce this net effect of efficiency losses on producer sector is diverting some of government revenue (import tax) to increase production efficiency, particularly with respect to the cost of technology development. It can be applied at the farmers level, in which most workers are involved. The forms of the technology development would involve introducing the best seeds, better technique of planting, production facilities (fertilizer, tools, and chemical products) in line with the local needs. The implementation of import tariff in consumer level particularly for underprivileged farmers can be solved by giving them subsidies. In this case, the government needs to apply two price system (protection price for producers and subsidized price for poor consumers). Import duty policy aimed at protecting domestic sugar production in a short term period is reasonable. However, in a long-term period this policy will not be applicable. Besides it inflicts not only in consumers financial loss (they must pay higher price), but also on the domestic sugar industry which in turn remains inefficient for being repeatedly protected. Moreover, in free trading era this situation is not applicable for longterm period. Import duty should decline gradually. As a result, it enables domestic sugar producers to renew their production system with the intention to improve efficiency and competitiveness compared to the foreign sugar industry. If the goal of import tariff implementation is to stabilize domestic price, it may not be effective because foreign price change will directly be transmitted to domestic price. If scarcity of domestic sugar commodity occurs, it will result in high price difference between domestic and foreign price, and a high import tariff will result in smuggling. Therefore, the import tariff influencing sugar commodity price in Indonesia should be controlled by the government. Table 3 presents the welfare distribution with assumption that price elasticity toward supply is about 0,41 and toward demand is about -0,45. The DRC value was calculated using the input and output value rates of cane sugar production in East java particularly in dry and wet fields in the annual planting period 1990/2008. This Cane sugar production in East Java constitute the basis of production cost considering that these fields are the biggest ones in Indonesia. As a result, calculating the DRC value for sugar cane planted in dry and wet fields adequately represent the national calculation. The results showed that DRC value of sugar cane planting in wet and dry fields is less than 1 (DRC=0.860 in wet field, and DRC=0.700 in dry field) implying that sugar product competitiveness in Indonesia is higher than the related product from other countries. Therefore, the hypothesis that sugar product competitiveness in Indonesia is lower than the same product from other countres cannot be accepted. This calculation result is in line with Ratnawati (2006), who found that coefficient value of domestic resource cost (DRC), planted either in dry field or in wet field, is less than 1 (DRC<1). This indicates that Cane sugar producers planting cane either in wet field or in dry field is economically efficient in using domestic resources. In other words, sugar cane producers get the advantage to produce sugar product in order to fulfill the import substitution. For Indonesia, It had better produce local sugar commodity in the season of devise saving than import sugar. But in fact, the demand has not been fulfilled, hence, to support local sugar in Indonesia the government needs to import sugar.

5 Rizal Rustam 194 Based on DRC value above, it cannot directly be interpreted. It must be noticed that there are lots of sugar factories in Indonesia (especially in East Java) have been aged and no longer efficient. The inefficient old small factories should be replaced as they reduce national sugar output and competitiveness Besides, it is necessary to consider how to relocate sugar factories outside Java for cane area since they are continually limited, and sugar product is to compete with other commodity (especially rice). In Java, cane planted in wet field cannot compete with other plants. This case occurs because the income from cane plants is relatively lower, and cane plants need higher cost of production and longer time. From counting on DRC value above, it appears that the efficiency and sugar production competitiveness in dry field is higher than in the wet fields. CONCLUSION The result of the evaluation on import tariff implementation to sugar product in Indonesia above contribute the following conclusion and suggestion: 1. From the results on the effect of import tariff on welfare distribution, it is clear that the government revenue, change of consumer surplus, producer surplus, economic net loss in production and consumption and exchange gain economization, are influenced by the import tariff and elasticity price toward supply and demand, so that the welfare distribution value will be bigger. 2. Sugar product competitiveness in Indonesia by cane field calculation in East Java is higher than the same product from other countries as DRC is less than unity. 3. The evaluation results above show that Indonesia has not been able to meet sugar demand from local production. To increase sugar production, it is necessary to increase the purchase of government sugar (provenue cost) and to increase planting areas and productivity through technology reparation in the farming level. 4. It is suggested that there should be further research with wider scope of discussion to include accounting of sugar product competitiveness in East Java. REFERENCES Indonesian Statistic Bureau. ( ) Indonesia Year Book, Jakarta Logistics Affair Agency. Statistic Bulog, BULOG. Jakarta Ismanto, HS. (1992) Elasticity Of Demand Sugar Cane Commodity In East Java, Thesis Post Graduate Program Gajah Mada University. Yogyakarta. Kustono, (1991) The ability of sugar cane industry to meet the demand in Indonesia Food Magazine No.II Volume 8 pp Khudori. (2000) Revitalisation Of Sugar Cane Industry To Empowering The Economy. Paper On One Day Seminar Strategy To Develop Sugar Cane Industry Facing The Global Free Market. State Polytechnic of Jember Ratnawati. (2006) The Study Of Agribusiness Efficiency System And The Policy To Develop Production And Distribution Of Sugar Cane In Indonesia. Bogor Institute of Farming. Bogor. Indonesian Sugar Statistic and Development Center (P3GI) (2008). Statistic and Number, Company Production Year P3GI. Pasuruan S.M. Kiptiyah (2007). The Implication Of Sugar Price Policy And Distribution Welfare Of Consumer, Government, And Producers to meet the Sugar Cane demand. Journal of Brawijaya University,.6. 1, (In press) Tsakok, Isabelle,. (1990) Agricultural Price Policy. A. Practitioners Guide To Partial Equilibrium Analysis. Cornell University Press New York